Williams v. Commissioner
| Decision Date | 11 May 1992 |
| Docket Number | Docket No. 36698-87. |
| Citation | 63 T.C.M. 2959 |
| Parties | Lloyd E. Williams, Jr. and Mildred A. Williams v. Commissioner. |
| Court | U.S. Tax Court |
J. Gordon Hansen, David E. Leta, and Stuart A. Fredman, for the petitioners. James R. McCann and James C. Lanning, for the respondent.
By notice of deficiency dated August 21, 1987, respondent determined a deficiency in petitioners' Federal income tax in the amount of $29,015, for the taxable year 1983, together with an addition to tax under section 6661. In an amended answer filed on September 26, 1988, respondent increased the deficiency to $61,011.50 and conceded that section 6661 was inapplicable. The deficiency at issue derives from respondent's disallowance of a deduction for unstated interest claimed by petitioner Lloyd E. Williams, Jr., in connection with his purchase of a one-half interest in a Utah condominium unit. We focus here on whether the sale to him of the one-half interest in the condominium occurred in June 1983. Petitioners claim that it did, such that the interest component of an installment payment of the purchase price made on December 30, 1983, is computed pursuant to section 1.483-1(a)(1), Income Tax Regs.
Some of the facts have been stipulated and are so found. The stipulation of facts filed by the parties and attached exhibits are incorporated herein by this reference. Unless otherwise noted, all section references are to the Internal Revenue Code of 1954 in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
At the time the petition in this case was filed, petitioners Lloyd E. Williams, Jr., and Mildred A. Williams resided in Kenilworth, Illinois. Hereinafter, the term "petitioner", when used in the singular, will refer to petitioner Lloyd E. Williams, Jr.
The Pinnacle at Deer Valley (The Pinnacle) is a condominium project located in Deer Valley, Park City, Utah. Deer Valley contains a ski resort. RDG Associates, a Utah limited partnership, is the developer of The Pinnacle and, during all times here relevant, marketed condominium units in The Pinnacle.1 On June 22, 1983, petitioner, a lawyer, and C. Barry Montgomery, one of petitioner's law partners (together, Buyers), entered into a condominium purchase agreement (the Purchase Agreement) with RDG Associates (Seller) to purchase a condominium unit in The Pinnacle.
Among other terms, the Purchase Agreement provides that the Buyers are purchasing, and the Seller is selling, Unit 37, a residential condominium, in The Pinnacle (the Condominium). The stated purchase price is $1,514,000. The Purchase Agreement requires the Buyers immediately to pay $10,000, as a downpayment, with the balance of the purchase price, or $1,504,000, to be paid in installments, in accordance with the terms of a promissory note (the Installment Note), to be described.
The Purchase Agreement requires certain documents to be placed in escrow, to be delivered by the escrow agent (Escrow Agent) on December 30, 1983, the "Settlement Date" (Settlement Date). The Seller was to place in escrow a warranty deed conveying to the Buyers title to the Condominium (Warranty Deed). The Buyers were to place in escrow a deed of trust, along with a rider to the deed (together, Second Deed of Trust), and a quitclaim deed reconveying the Condominium from the Buyers to the Seller (Quitclaim Deed). The Warranty Deed, Second Deed of Trust, and Quitclaim Deed were executed by the appropriate persons on June 23, 1983, and placed in escrow.
The Purchase Agreement states further that the Buyers entered into possession of the Condominium as of June 22, 1983, and that the parties would enter into a Memorandum of Condominium Purchase Agreement (Memorandum of Purchase Agreement). The Memorandum of Purchase Agreement is described as "evidencing Buyer's purchase of, and equitable title to, the Condominium". The memorandum was executed on June 23, 1983, and recorded on June 27, 1983. Upon recordation of the Memorandum of Purchase Agreement, the Seller was obligated to deliver to the Buyers a commitment to issue a title insurance policy. The Purchase Agreement provides that real estate taxes are to be prorated as of June 22, 1983, to reflect that the benefits and burdens of ownership have transferred to the Buyers. Further, the Buyers have no right to assign or transfer the Purchase Agreement or their rights under that agreement without the Seller's prior written consent.
The Purchase Agreement requires the Condominium to be completed and equipped according to certain specifications reviewed by the Buyers, but it grants the Seller the right to make certain changes provided that such changes do not materially diminish the Condominium's value. The Purchase Agreement obligates the Seller to use reasonable efforts to have the Condominium fully constructed and ready for occupancy by December 30, 1983, and requires the Seller to complete the Condominium, and the entire building of which the Condominium is a part, within 200 or fewer days, or by early January 1984. On June 23, 1983, the Buyers paid the sum of $10,659.72 to the Seller, which sum included the downpayment ($10,000), an estimated proration of taxes ($259.72), and a homeowner's capitalization fee ($400). Petitioner paid one-half of that sum. On June 23, 1983, the residential unit of the Condominium had not yet been constructed. On that date, excavation for the building containing the residential unit had been completed and a few supports and beams had been placed. The residential unit was not completed until after January 1, 1984.
The Installment Note, dated June 23, 1983, has a stated face amount of $1,504,000. It calls for two payments. The first payment (first installment), in the amount of $477,000, is due on the Settlement Date, December 30, 1983, and the second payment (second installment), in the amount of $1,027,000, is due on July 24, 2013. The Installment Note states: "No interest shall be charged on the face amount owed hereunder during the term thereof."
To secure partially their obligation to make the first installment (due on the Settlement Date), the Buyers executed contemporaneously with the Installment Note a judgment note, in the amount of $50,000 (Judgment Note). Upon payment of the first installment, the Seller was to return the Judgment Note to the Buyers.
The Installment Note contemplates that the Buyers might finance the first installment ($477,000). It provides that the obligation to pay the second installment on July 24, 2013, would be subordinate to such financing.
The Purchase Agreement provides the Seller with two remedies in the event of a default by the Buyers prior to the Settlement Date (Pre-Settlement Default):
(i) Seller may be released from all obligations in law and equity to convey fee simple title to the [Condominium] and Buyer shall become at once a tenant at will of Seller. Upon written notification from Seller, Escrow Agent shall record the Quit-Claim Deed from Buyer to Seller deposited with Escrow Agent herewith, and all payments which have been made previously under this agreement by Buyer, together with the Judgment Note, shall be retained by Seller as liquidated and agreed damages for breach of this Agreement, and Seller shall be entitled in connection therewith to make demand for payment of the proceeds of the Judgment Note; or
(ii) Seller may, upon written notice to Buyer, declare the entire amount under the Installment Note at once due and payable and may elect to treat this Agreement as a note and mortgage, and tender title to Buyer subject thereto, and proceed immediately to foreclose the same in accordance with the laws of the State of Utah, and have the *** [Condominium] sold and the proceeds applied to the payment of the balance owing, and Seller's costs and attorneys' fees; provided, however, that Seller's sole remedy in such an event shall be to foreclose Buyer's rights under this Agreement, and Buyer shall not be liable for any deficiency between the amounts owed under the Installment Note and the proceeds from such foreclosure. [Emphasis added.]
The Purchase Agreement provided the Buyers with one remedy in the event of the Seller's default prior to Settlement Date:
In the event Seller defaults under this Agreement prior to the Settlement Date, Buyer's sole and exclusive remedy shall be to terminate and rescind this Agreement, whereupon Seller shall return to Buyer all sums previously paid by Buyer to Seller hereunder and any prior reservation agreement, together with interest thereon at the rate of six percent (6%) per annum, and Seller shall cancel and return to Buyer the Judgment Note, the [Installment] Note, and the Trust Deed [i.e., Second Deed of Trust]. Upon such termination, Escrow Agent shall record with the Summit County, Utah, Recorder the Quit-Claim Deed to the Condominium deposited with Escrow Agent herewith, and Seller and Buyer shall have no further obligations to each under this Agreement or any other agreement with respect to this transaction.
The Seller and the Buyers signed a letter dated June 23, 1983, containing handwritten revisions and additions that modified the terms of the transaction. Later, that letter was retyped, and a few other revisions and additions were made. The retyped letter, dated September 15, 1983, was then executed by the parties. We shall refer to those two letters collectively as the "Side Agreement".
Under the Side Agreement, the Seller could not sell the Installment Note for 5 years and could not exercise any right to demand payment of the second installment under the Installment Note prior to July 24, 2013. The Side Agreement further provided that the Seller was willing to sell the Installment Note back to the Buyers at a present-value price ...
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